Emulex, QLogic Shares Jump, But Lean Still the Watchword
When data storage bellwether EMC Corp. sneezes, Emulex Corp. and QLogic Corp. don’t just get a cold,their shares seem to catch a nasty case of atrophy.
That was the case late last month when EMC said it would lay off 1,100 workers as it struggles to meet revenue targets. But for Costa Mesa-based Emulex and Aliso Viejo-based QLogic, which both make speedy fibre-channel products for data networks, the EMC fallout was short-lived,both stocks turned up again last week.
In fact, shares in the two companies have been on a relative tear for the two months leading up to the EMC chill, signaling that the data networking sector still is better off than the beaten-down chip and networking segments.
QLogic shares have jumped 170% since April, when the company first said its sales growth was slowing. Emulex shares also climbed substantially, posting a 110% gain in the same period.
“We’ve been impacted by the economy. Investors want a company with the staying power to see this through,” said QLogic Chief Financial Officer Tom Anderson.
Emulex, like its 1994 spin-off QLogic, makes chips and components for data storage device makers such as Sun Microsystems Inc., Hewlett-Packard Co. and Compaq Computer Corp.
The recent rebound comes after a steady decline in both companies’ shares starting in January. Emulex is nearly 64% off its high for the year while QLogic is about 34% down from its price in January,when technology sales fell off a cliff.
“The business and economic environment can change pretty quickly,” said Emulex Chief Financial Officer Michael Rockenbach. “It became apparent very quickly this time.”
Still, Emulex and QLogic have fared better than other Orange County tech companies. Irvine chip designer Broadcom Corp. is off nearly 90% from its August high. Irvine-based Newport Corp., a maker of production gear for optical components, is off 80% from its September peak.
Both Emulex and QLogic say they’re focusing on product research and development in preparation for a rebound in tech spending. In the most recent quarter vs. a year earlier, QLogic’s spending on research and development grew by more than 40% while Emulex’s more than doubled.
The goal: run the leanest ships and have the coolest products for when big corporations start spending money on computer storage gear.
For Emulex, that means trimming operations and integrating the privately held Giganet Inc., which it acquired earlier this year.
“Immediately what you do when the economy does what it did is look at what you’re spending money on,” Rockenbach said. “You look at all those data points and try to see where you can trim.”
Additionally, Emulex’s order growth began to pick up again in April in May, according to Rockenbach.
“We are actually booking new business, which wasn’t the case in February,” he said.
Despite talk of slowing growth and a reduction in sales estimates, some analysts still recommend Emulex as a buy.
“Our reduction in estimates is entirely a reflection of weakness in the overall market,” said William Lewis of JP Morgan H & Q.; “We continue to believe that Emulex is the best-positioned to rebound once the demand for storage networks systems is rejuvenated.”
The same could be said for QLogic, which has been busy making sales deals, developing new products and cutting costs. Sun Microsystems struck a deal recently to buy Qlogic components for its workstations.
QLogic also has invested in developing new products to come out later this year. And the company has cut back on earlier expansion plans,shelving construction of a new building at its Aliso Viejo campus.
“We are really under the gun in the last three or four months. The economic pressure has been more pervasive and unrelenting,” Anderson said. “The problem is what feedback we get from our customers. Generally, the visibility that we get from them is very poor.”
QLogic boasts a more diversified product line than some of its counterparts, which has spared it the type of slowdown facing other storage component suppliers such as San Jose-based Brocade Communications Systems Inc. and Camarillo-based Vitesse Semiconductor Corp.
Like Emulex, Wall Street has plenty of positive things to say about QLogic.
BancBoston Robertson Stephens analyst Asa Mizrakjian called QLogic “one of the premier players in storage area networking.”
“Our optimism for QLogic remains robust over the longer-term,” he said. “Despite near-term weakness and uncertainty, the opportunity remains strong,we believe it is a question of when we will see a recovery, not if we will.”
Analysts are looking to the latter part of this year for data storage sales growth to return. Still, spending on storage could return earlier, as companies need more storage capacity to handle growing mounds of business data, according to QLogic’s Anderson.
That’s certainly the attitude among industry analysts, who see the disk storage market growing 12% on a compound annual basis to $53.3 billion in 2004, up from $28 billion in 1999.
“Several factors are contributing to the storage market’s overall growth,” said Charlotte Rancourt, an analyst with International Data Corp. “One factor is the migration to networked storage, in which demand for nonstop access to information any time, anywhere will continue to drive storage strategies and revenue growth.” n
